N.Y. Insurance Law § 6903: Contingency, loss and unearned premium reserves

§ 6903. Contingency, loss and unearned premium reserves. (a)

Contingency reserves. (1) A corporation shall establish and maintain

contingency reserves for the protection of insureds and claimants

against the effects of excessive losses occurring during adverse

economic cycles.

(2) With respect to all financial guaranties written prior to and in

force as of the first day of the next calendar quarter commencing after

the date that the act enacting this article shall become law:

(A) the insurer shall establish and maintain a contingency reserve

consistent with the requirements applicable for municipal bond

guaranties in effect prior to the effective date of this article equal

to fifty percent of earned premiums on such policies; and

(B) to the extent that the insurer's contingency reserves maintained

as of the first day of the next calendar quarter commencing after the

date that the act enacting this article shall become law are less than

those required for municipal bond guaranties, the insurer shall have

three years from such date to bring its contingency reserves into

compliance.

(3) With respect to financial guaranties of municipal obligation

bonds, special revenue bonds, industrial development bonds and utility

first mortgage obligations written on and after the first day of the

next calendar quarter commencing after the date that the act enacting

this article shall become law:

(A) the insurer shall establish and maintain a contingency reserve for

all such insured issues in each calendar year for each category listed

in subparagraph (B) of this paragraph;

(B) the total contingency reserve required shall be the greater of

fifty percent of premiums written for each such category or the

following amount prescribed for each such category:

(i) municipal obligation bonds, 0.55 percent of principal guarantied;

(ii) special revenue bonds, and obligations demonstrated to the

satisfaction of the superintendent to be the functional equivalent

thereof, 0.85 percent of principal guarantied;

(iii) investment grade industrial development bonds, secured by

collateral or having a term of seven years or less, and utility first

mortgage obligations, 1.0 percent of principal guarantied;

(iv) other investment grade industrial development bonds, 1.5 percent

of principal guarantied; and

(v) all other industrial development bonds, 2.5 percent of principal

guarantied; and

(C) Contributions to the contingency reserve required by this

paragraph, equal to one-eightieth of the total reserve required, shall

be made each quarter for twenty years, provided, however, that

contributions may be discontinued so long as the total reserve for all

categories listed in items (i) through (v) of subparagraph (B) of this

paragraph exceeds the percentages contained in such items (i) through

(v) when applied against unpaid principal.

(4) With respect to all other financial guaranties written on or after

the first day of the next calendar quarter commencing after the date

that the act enacting this article shall become law:

(A) the insurer shall establish and maintain a contingency reserve for

all such insured issues in each calendar year for each such category

listed in subparagraph (B) of this paragraph;

(B) the total contingency reserve required shall be the greater of

fifty percent of premiums written for each such category or the

following amount prescribed for each such category:

(i) investment grade obligations, secured by collateral or having a

term of seven years or less, 1.0 percent of principal guarantied;

(ii) other investment grade obligations, 1.5 percent of principal

guarantied;

(iii) non-investment grade consumer debt obligations, 2.0 percent of

principal guarantied;

(iv) non-investment grade asset-backed securities, 2.0 percent of

principal guarantied;

(v) other non-investment grade obligations, 2.5 percent of principal

guarantied; and

(C) Contributions to the contingency reserve required by this

paragraph, equal to one-sixtieth of the total reserve required, shall be

made each quarter for fifteen years, provided, however, that

contributions may be discontinued so long as the total reserve for all

categories listed in items (i) through (v) of subparagraph (B) of this

paragraph exceeds the percentages contained in such items (i) through

(v) when applied against unpaid principal.

(5) Contingency reserves required in paragraphs two, three and four of

this subsection may be established and maintained net of collateral and

reinsurance, provided that, in the case of reinsurance, the reinsurance

agreement requires that the reinsurer shall, on or after the effective

date of the reinsurance, establish and maintain a reserve in an amount

equal to the amount by which the insurer reduces its contingency

reserve, and contingency reserves required in paragraphs three and four

of this subsection may be maintained (A) net of refundings and

refinancings to the extent the refunded or refinanced issue is paid off

or secured by obligations which are directly payable or guarantied by

the United States government and (B) net of insured securities in a unit

investment trust or mutual fund that have been sold from the trust or

fund without insurance.

(6) The contingency reserves may be released thereafter in the same

manner in which they were established and withdrawals therefrom, to the

extent of any excess, may be made from the earliest contributions to

such reserves remaining therein:

(A) with the prior written approval of the superintendent:

(i) if the actual incurred losses for the year, in the case of the

categories of guaranties subject to paragraph three of this subsection

exceeds thirty-five percent of earned premiums, or in the case of the

categories of guaranties subject to paragraph four of this subsection

exceed sixty-five percent of earned premiums; or

(ii) if the contingency reserve applicable to the categories of

guaranties subject to paragraph three of this subsection has been in

existence for less than forty quarters, or for less than thirty quarters

for the categories of guaranties subject to paragraph four of this

subsection, upon a demonstration satisfactory to the superintendent that

the amount carried is excessive in relation to the insurer's outstanding

obligations under its financial guaranties.

(B) upon thirty days prior written notice to the superintendent,

provided that the contingency reserve applicable to the categories of

guaranties subject to paragraph three of this subsection has been in

existence for forty quarters, or thirty quarters for categories of

guaranties subject to paragraph four of this subsection, upon a

demonstration satisfactory to the superintendent that the amount carried

is excessive in relation to the insurer's outstanding obligations under

its financial guaranties.

(7) An insurer providing financial guaranty insurance may invest the

contingency reserve in tax and loss bonds (or similar securities)

purchased pursuant to section 832(e) of the Internal Revenue Code (or

any successor provision), only to the extent of the tax savings

resulting from the deduction for federal income tax purposes of a sum

equal to the annual contributions to the contingency reserve. The

contingency reserve shall otherwise be invested only in classes of

securities or types of investments specified in paragraphs one through

three of subsection (b) of section one thousand four hundred two of this

chapter and paragraphs one through three of subsection (a) of section

one thousand four hundred four of this chapter.

(b) Loss reserves. (1) The case basis method or such other method as

may be prescribed by the superintendent shall be used to establish and

maintain loss reserves, net of collateral, for claims reported and

unpaid, in a manner consistent with section four thousand one hundred

seventeen of this chapter. A deduction from loss reserves shall be

allowed for the time value of money by application of a discount rate

equal to the average rate of return on the admitted assets of the

insurer as of the date of the computation of any such reserves. The

discount rate shall be adjusted at the end of each calendar year.

(2) If the insured principal and interest on a defaulted issue of

obligations due and payable during any three years following the date of

default exceeds ten percent of the insurer's surplus to policyholders

and contingency reserves, its reserve so established shall be supported

by a report from an independent source acceptable to the superintendent.

(c) Unearned premium reserve. An unearned premium reserve shall be

established and maintained net of reinsurance and collateral with

respect to all financial guaranty premiums. Where financial guaranty

insurance premiums are paid on an installment basis, an unearned premium

reserve shall be established and maintained, net of reinsurance and

collateral, computed on a daily or monthly pro rata basis. All other

financial guaranty insurance premiums written shall be earned in

proportion with the expiration of exposure, or by such other method as

may be prescribed by the superintendent.